Pharma industry: a case for smart tax reforms

Pakistan’s economy is at an inflection point. Amid shifting global dynamics and domestic fiscal pressures, the country faces urgent need to broaden its export base, reduce dependence on imports, and stimulate industrial growth.

The pharmaceutical industry, often overlooked in strategic policymaking, holds tremendous potential – not only as a healthcare provider but also as a major export contributor. However, to realise this potential, it must be empowered through progressive, targeted, and growth-enabling tax reforms.

The current tax regime, unfortunately, acts as a deterrent to investment, reinvestment, and expansion in the sector. Pharmaceutical exporters are facing a steep rise in their tax burden.

Where previously only 1 percent of export proceeds were taxed, companies are now subject to a minimum tax of 29 percent on profits along with super tax, where applicable. This disincentive comes at a time when global markets are becoming increasingly competitive and export-led economies are providing robust support to their industries.

To address this challenge, a set of forward-looking tax relief measures is proposed to encourage investments in the pharmaceutical sector and accelerate its transition into a high-growth, export-driven industry.

Central to these measures is a tax credit for pharmaceutical export units that demonstrate year-on-year growth. This would ease the financial strain on exporters and enable reinvestment into product development, regulatory compliance, and market expansion.

Alternatively, a tiered tax credit mechanism could be introduced, tied to incremental export growth, it would reward performance and instill a sense of predictability and purpose in business planning. Exporters achieving 5–10 percent growth should receive a 5 percent tax reduction, 11–15 percent growth would merit 10 percent, 16–20 percent would be eligible for 15 percent, and growth above 20 percent should attract a 20% tax relief.

Moreover, investments in meeting global standards crucial for entering developed pharma markets should be incentivized.

Currently, accelerated depreciation is only allowed on Plant and Machinery. It is proposed that companies that make specific investments for upgrading plants to enter export markets should be incentivized with an accelerated depreciation and/or tax credit on the total investment amount. This system is critical for a sector with long product cycles and regulatory hurdles.

Another area of concern is the Super Tax under Section 4C of the Income Tax Ordinance 2001. Introduced as a temporary fiscal measure, it has now become a structural burden that penalizes profitability, even when that profitability stems from export activities that benefit the national economy. It is proposed that income generated from pharmaceutical exports be exempted from this tax.

Additionally, industries that promote export or substitute imports should either be fully exempt or provided significant relief from this levy. Encouraging reinvestment through tax relief is essential for sustained industrial growth and innovation.

The corporate tax rate in Pakistan is already amongst the highest in the region. In an increasingly globalized economy, where capital moves to countries with stable and attractive fiscal environments, Pakistan must realign itself with peer economies. A reduction in the corporate tax rate to 28% for the fiscal year 2025-26 is recommended, followed by a gradual annual 1 percent reduction to reach 25 percent within five years. This would bring Pakistan in line with regional competitors, provide clarity to investors, and stimulate long-term strategic planning.

A critical element that requires attention is the minimum tax carry forward mechanism. Currently, excess tax paid under Section 113 can be carried forward for only three years, down from the original five. This change significantly impacts new ventures, particularly in pharmaceuticals, where research, development, and regulatory approvals can take years.

Restoring the five-year period would ease early-stage financial pressure and support business viability during their formative years.

The rollback of full withholding tax exemption has created liquidity issues for many companies. Previously, 100% exemption was granted once advance tax liability was settled.

The 2024 Finance Act replaced this with an 80% exemption, which has led to a liquidity crunch and undermines the principle of fairness, especially given the multiple advance tax obligations under Sections 148, 236, and others. Restoring the original exemption would alleviate unnecessary cash flow constraints and ensure smoother business operations.

The OICCI recommends restoring the zero-rated sales tax regime for DRAP-registered pharmaceutical products and exempting packing materials and diagnostic kits to reduce costs, thereby supporting the sector’s sustainability and improving healthcare delivery. It also highlights the issue of delayed sales tax refunds under the FASTER system, introduced with the zero-rated regime in January 2022, which remain pending despite the 72-hour processing rule—putting pressure on the sector’s working capital, especially after the transition to a 1% final tax regime.

Additionally, the OICCI calls for the abolition of the 3% value-added tax on imported finished pharmaceutical and diagnostic products under the Twelfth Schedule, which effectively increases the tax burden to 4% in a price-regulated sector—contradicting the 1% final tax goal of the Eighth Schedule. It further recommends extending the sales tax exemption under Entry No. 166 of the Sixth Schedule to include government institutions, departments, and hospitals, not just charitable hospitals.

In addition to tax reforms, rethinking the structure and utilization of the Central Research Fund (CRF) is critical to unlocking Pakistan’s pharmaceutical export potential. As Pakistan’s pharmaceutical companies set their sights on developed and regulated international markets, they must meet the stringent standards of global regulatory authorities.

This requires significant investment in dossier development, formulations, bioequivalence studies, and advanced R&D. These are not optional expenditures; they are critical pathways to global access. For this, pharmaceutical companies must be empowered to directly utilize CRF contributions for high-impact, industry-led research initiatives that align with export goals and regulatory advancement. This would ensure a more targeted use of resources and accelerate the industry’s readiness for global competition.

A further opportunity lies in reforming the Workers’ Welfare Fund (2 percent) and the Workers’ Profit Participation Fund (5%). While the intent behind these contributions is to improve the lives of workers and their families, the reality is that funds are not efficiently utilized by public institutions.

The proposal is simple: allow responsible companies to directly spend these funds on the healthcare, education, and well-being of their employees, under government oversight. This model would lead to more targeted interventions, increased accountability, and ultimately, greater worker satisfaction and productivity.

The pharmaceutical industry in Pakistan is not just about manufacturing medicine, it is about ensuring public health, enabling innovation, generating employment, and earning foreign exchange. A vibrant and export-driven pharmaceutical sector can play a pivotal role in stabilizing Pakistan’s economy. But to get there, we must embrace policies that encourage growth rather than penalize it.

These proposals are not demands, they are strategic recommendations aimed at building a stronger, more competitive Pakistan. By shifting from a corrective tax approach to a performance-based, incentive-driven framework, we can create the right environment for our pharmaceutical sector to thrive. This in turn will unlock wider industrial development, reduce trade deficits, and provide greater access to healthcare both domestically and abroad.

It is time for Pakistan to take bold, intelligent steps toward fiscal reform. Let’s trust our industries, reward growth, and unleash the potential that has long remained dormant.

Copyright Business Recorder, 2025